If you weren’t familiar with the term “speculative bubble” before the U.S. economy imploded in 2008, you probably were after the crash. It quickly became part of our everyday lexicon as the government began to bail out many of the institutions that speculated in high-risk financial products during the housing boom.

Speculative bubbles are based primarily on exaggerated expectations of future growth, and a new report states that Australia is ripe for a speculative financial implosion. The culprit? Coal.

John Connor is one of the report’s authors and CEO of The Climate Institute, a Sydney-based independent research organization focused solely on the issue of climate change. His group’s findings indicate that Australia’s coal reserves will become worthless if governments throughout the world follow through on their promises to limit carbon emissions.

“With greenhouse gases in the atmosphere about to breach the 400 parts-per-million level for the first time in three million years, it is important to step back from the politics and remind ourselves of the basic physics at the core of the climate challenge,” Connor tells TakePart.

“What matters are not just annual emissions or targets in 2020, but the overall stock of greenhouse gases and carbon pollutants in the atmosphere that are driving global warming,” he says. “The planet has a carbon budget that cannot be ignored in the investment and other decisions we make on climate change. In a match-up of physics versus finance, Isaac Newton versus Adam Smith, the physics will win.”

Connor points out that this is no small matter for investors and regulators who are waking up to the costs of climate change—and the fact that the costs of inaction will overwhelm the costs of action.

“Australia, China, the U.S. and over 170 countries have committed internationally to avoid warming of more than 2°C above pre-industrial levels—indeed even to see if it can be kept to 1.5°C,” notes Connor.

“While there are reasons to be skeptical about our ability to achieve the 2°C, there are a range of social, political and technological scenarios that can see us still achieve that goal,” says Connor. “Doing so will involve abrupt, bumpy and tumultuous changes.”

“Investments in high-carbon assets, and their complex financing webs, will be wasted or stranded with consequences that would cascade through financial and economic systems. It will drive a financial crisis not unlike the sub-prime crisis that came when the assumption of ever-increasing house prices collapsed and burst a massive bubble of mortgage loans and associated financial products.”

The Climate Institute has been arguing for a number of years that asset owners like pension funds should factor in the risks of rapid devaluation of high-carbon assets. “This has recently gone global with the Asset Owners Disclosure Project, so we weren’t fully surprised, but this first analysis of Australia’s bubble was bigger and more imminent than expected,” says Connor.

He also notes that while governments, investors and even many coal companies say they take climate change seriously, that’s clearly not the case or they would realize their Australian investments could be in a costly speculative bubble. “Last year alone, Australian-listed companies spent an estimated AU$6 billion on developing more coal reserves,” says Connor.

This is particularly counterintuitive when you consider that an increasing number of countries that import Australian coal, such as China, are indicating that their coal use will soon peak.

“Investors really need to challenge the assumption that coal demand will continue to rise in China and elsewhere; otherwise billions of dollars of taxpayer, superannuation and shareholder funds will be wasted in assets linked to unburnable carbon,” says Connor.

He does add that Australia has taken a small but significant step away from coal with a carbon laws package that limits and prices carbon emissions, invests in clean, renewable energy, and supports the economy as it transitions to a low-carbon economy. Connor notes that the “Renewable Energy Target has already underpinned some $18 billion in investment in clean energy in Australia since 2001, and can encourage a further $18 billion in the years to 2020.”

But the smoke from coal has not cleared quite yet. “Some of these policies are under threat in the forthcoming election with the more popular opposition party threatening to be the first country to demolish a carbon market,” says Connor. So we need to protect these policies but take larger steps with more ambitious reduction targets and greater energy productivity reforms.”

Do you agree that the world’s governments will follow through on their carbon-reduction plans?

Lawrence Karol is a writer and editor who lives with his dog, Mike. He is a former Gourmet staffer and enjoys writing about design, food, travel and lots of other stuff. @WriteEditDream | Email Lawrence | TakePart.com

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